Infosys on Thursday announced a higher dividend payout ratio along with a separate allocation of Rs 13,000 crore to be distributed to shareholders through a buyback or as dividends during FY18.

The Infosys board proposed a final dividend of Rs 14.75 per equity share for FY17. (Reuters)

Infosys on Thursday announced a higher dividend payout ratio along with a separate allocation of Rs 13,000 crore to be distributed to shareholders through a buyback or as dividends during FY18. For months together, cash reserves of Rs 38,773 crore, or $6 billion, had led to several questions from investors on how Infosys was going to utilise this liquidity.

Under the revised capital allocation policy, the company increased the dividend payout ratio to 70% from the earlier 50% of post-tax profits. “Effective FY18, the company expects to pay out up to 70% of the free cash flow of the corresponding financial year in such manner (including by way of dividend and/or share buyback) as may be decided by the Board from time to time,” Infosys stated. In addition to the above, the Infosys Board has also identified an amount of up to Rs 13,000 crore ($2 billion) to be paid out to shareholders during FY18, in such a manner (including by way of dividend and/or share buyback), to be decided by the board.

The Infosys board proposed a final dividend of Rs 14.75 per equity share for FY17. The proposed dividend payout would result in a cash outflow of approximately Rs 4,078 crore. The objective behind share buyback is improving the earnings per share and to return surplus cash to shareholders, while also supporting stock price during a bad patch. The earning per share (EPS) ratio of Infosys has increased 6.4% to 62.80 in FY17, from 59.03 during the previous financial year.

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Morgan Stanley, in its note, said, “Assuming a conversion of 70%-90% of net income into free cash flow (based on historical trends), the revised policy implies a regular payout of 50%-63% (vs current policy of payout of up to 50% of net income).” On the the amount of Rs 13,000 crore, Morgan Stanley said, “Even if we assume a flat regular payout for FY18 (same as FY17 of Rs 7,100 crore), the total return to shareholders from regular and one time payout would be approximately Rs 20,000 crore which implies 9% of its current market cap.”

India’s second largest IT firm’s announcement came about two months after rival companies announced their share buyback plans. Following investor activism, Cognizant’s board had approved a plan to return $3.4 billion to shareholders over the next two years through share buybacks and dividend. Even Tata Consultancy Services announced its mega buyback offers worth Rs 16,000 crore.